Taxing on our innovation

One somnolent corner of the Boston-business ecosystem woke up last week to an unpleasant reality about operating here in the Bay State. If you’re not paying attention, Beacon Hill is going to screw you.

The state’s IT consulting industry, which is ubiquitous but not well organized, now must charge a 6.25 percent sales tax on its services. They are confused — and hopping mad. Any work under the general category of “the planning, consulting or designing of computer systems that integrate computer hardware, software, or communications technologies and are provided by a vendor or third party” gets taxed.

But the truth is, every single business in the state that aspires to improve the quality of software processes stands to get screwed by this new tax.

That because it’s possible that most businesses, even small ones, will have to pay a new tax, for IT upgrades are indispensable to running a competitive business.

So Beacon Hill created, in essence, an innovation tax. If you want to run a smarter, faster, more competitive business in Massachusetts, it’s going to cost you an additional 6.25 percent for the privilege.

But it gets stranger and more confusing, for there are exemptions: For example, data management, information management and data processing services are now exempt. Who does that leave? No one is quite sure. Certainly not Beacon Hill.

The IT industry has pointed out that legislators obviously didn’t know anything about how IT consulting works when they passed the law. That’s too kind. Beacon Hill knew next to nothing about what they were doing when they passed this tax.

You know that’s true when legislators already are saying they’re open to better defining the law as it’s just hitting the books under the full enforcement might of the Department of Revenue. The new tax receipts very well could pour in. There’s every possibility this new tax will yield $1 billion in revenue or more because no one really knows just how pervasive software installation and design is in Massachusetts. If there’s $20 billion in annual local economic activity in the industry, the take will be $1.25 billion. It’s likely that the Massachusetts Taxpayer Foundation’s estimate of $500 million is low.

Is there a silver lining? Well, there are always winners when government springs surprises on business. In this case it’s tax lawyers. For them, the phone is ringing off the hook.